The Progressive Era (excluding WWI): 1890-1913

Prior to the Progressive Era, politicians were generally reluctant to use the federal government to intervene in the private sector. Laissez-faire, a doctrine opposing government interference in the economy, was generally accepted by the public except in law and order issues and the railroad industry. By 1890, this attitude slowly began to change when a collection of labor movements, small businesses and farm interests slowly began lobbying the government to intercede on their behalf. The middle class was beginning to reach critical mass and began to demonstrate a leeriness of both business elites as well as the radical farmer and labor movements who were coalescing around a fledgling Progressive movement, encouraged by journalists, known as Muckrakers, and authors such as Upton Sinclair.

Progressives, in contrast to earlier generations, favored government regulation of business to achieve, in their opinion, market competition and free enterprise. Their goal was to temper the power of trusts and monopolies that had created enormous wealth controlled by only a few individual industrialists whose names are legendary such as John D. Rockefeller (oil), Andrew Carnegie (railroads and steel), Jay Gould (finance and railroads), Leland Stanford (railroads) and Cornelius Vanderbilt (railroads).

Like the Gilded Age, the Progressive Era also had its share of recessions and panics. The most serious was the Panic of 1893. Like that ofearlier crashes, it was caused a set off a series of bank failures this time caused by railroad overbuilding and shaky financing.. Compounding market overbuilding and a railroad bubble was a run on the gold supply and a policy of using both gold and silver metals as a peg for the US Dollar value. Only three years later, the U.S. experienced another panic in 1896 and while it was sharp and resulted in the failure of the National Bank of Illinois in Chicago, it was less serious than other panics. It was caused by a drop in silver reserves and market concerns on the effects it would have on the gold standard. Deflation of commodities prices drove the stock market to new lows in a trend that began to reverse only after the 1896 election of William McKinley.

The most significant panic was the 1907 Banker’s Panic. It occurred during an economic contraction, as measured by the National Bureau of Economic Research, which began in May 1907 and ended in June of 1908. Robert Bruner and Sean Carr recite the economic damage in The Panic of 1907: Lessons Learned from the Market’s Perfect Storm. During the contraction, industrial production dropped further than in any prior bank run. 1907 also saw the second-highest volume of bankruptcies to that date. Industrial production fell by 11%, imports by 26% and unemployment rose from 3% to 8%. Immigration dropped to 750,000 in 1909, down from 1.2 million two years earlier.

The history of the panic is insightful for underscoring the lack of institutional safeguards as well as the influence of specific groups and individuals on the markets . The panic began when an attempt to corner the market on United Copper Company stock failed. Banks that had lent money to the cornering scheme suffered runs that later spread to affiliated banks and trusts, leading a week later to the downfall of the Knickerbocker Trust Company, New York City’s third-largest trust. The collapse generated fear throughout the city’s trusts as regional banks withdrew reserves from New York City banks. The Panic spread nationwide as depositors in turn withdrew funds from their regional banks.

At the time, the United States did not have a central bank to inject liquidity into the banking system. Fortunately, J. P. Morgan, New York’s most famous and well-connected financier, intervened and pledged support from his personal fortune while convincing other New York bankers to do the same. However, within hours of the banking crisis solution another potential panic emerged when one of Wall Street’s largest brokerage firms, Moore & Schley, began to fail after borrowing heavily while using the stock of Tennessee Coal, Iron and Railroad Company (TC&I) as collateral. The value of this stock was under pressure and it was presumed that many banks would likely call the brokerage’s loans forcing a sudden liquidation of the stock. If that occurred, it would have sent shares of TC&I plummeting, devastating Moore and Schley and causing a further panic in the market. Again, Morgan stepped in, using his personal influence to arrange for U.S. Steel Corporation to acquire TC&I, despite the fact that such an acquisition would violate the Sherman Antitrust Act. In what must have been perceived as a perfect storm, J.P. Morgan was immediately confronted with another situation following his banking interventions as concerns arose that the Trust Company of America and the Lincoln Trust mightfail to open on Monday due to continuing runs. On a Saturday evening, Morgan hosted top bankers at his residence to discuss the crisis, with the clearing-house bank presidents in the East room, trust company executives in the West room and those dealing with the Moore & Schley situation in his library office. There, Morgan told his counselors that he would agree to help shore up Moore & Schley only if the trust companies would work together to bail out their weakest members. The discussion among the bankers continued late Saturday night but without any real progress. Then, around midnight, J.P. Morgan informed a leader of the trust company presidents of the Moore & Schley situation that was going to require $25 million and that he was not willing to proceed with any assistance unless the problems with the trust companies could also be solved. He also informed the trust companies that they would not receive further help and that they had to reach their own solution. As the discussions continued, Morgan locked them in his library and hid the key to force a solution while warning them that without a solution, the entire banking systems would fail. Finally, at 4:45 in the morning, he persuaded the leaders of the trust companies to sign an agreement and allowed them to go home. The next day, Morgan and his representatives, along with U.S. Steel’s Gary and industrialist Henry Clay Frick, worked at the library to finalize the acquisition of TC&I by U.S. Steel, yet one obstacle remained: the anti-trust crusading President Theodore Roosevelt who had made breaking up monopolies a focus of his presidency.

Morgan sent Frick and Gary overnight by train to the White House to implore Roosevelt to approve the acquisition and set aside the principles of the Sherman Antitrust Act before the market opened. With less than an hour before the markets opened, Roosevelt and Secretary of State Elihu reviewed the proposed takeover and assessed the news of a potential crash if the merger was not approved. Roosevelt relented and when the news reached New York, confidence soared. The Commercial & Financial Chronicle reported that “the relief furnished by this transaction was instant and far-reaching.” The final crisis of the panic had been averted. But the frequency of previous crises and the severity of the 1907 panic added to widespread concern over the large role J.P. Morgan and other bankers played, which led to renewed calls for a national debate on reform. The next year, Congress passed the Aldrich–Vreeland Act, which established the National Monetary Commission to investigate the panic and to propose legislation to regulate banking.. The result was that the Federal Reserve Act of 1913 took effect in November, 1914, when the 12 regional banks commenced operations.

Despite the increase in government intervention in the economy, the CEPPI indicator reports that economic conditions were generally excellent with very low rates of inflation, mild unemployment, budget surpluses or mild deficits and a growth rate of 3.7% between 1890 and 1913. Exceptions to this favorable climate occurred in 1904, 1908 and 1910, which is consistent with recessionary business cycle activity. The economy enjoyed stable prices on average, mild budget deficits and surplus, low rates of unemployment and moderate growth in GDP.